Arms Races and Negotiations

A state which does not desire an arms race may nevertheless acquire new weapons if it believes another state will acquire them. If each state assigns some arbitrarily small probability to the event that the other state has a dominant strategy to acquire more weapons, then a multiplier effect appears, and the unique Bayesian Nash equilibrium involves an arms race with probability one. However, if the prior probability that a player is a dominant strategy type is sufficiently small, then there is an equilibrium of the cheap-talk extension of the arms race game where the probability of an arms race is close to zero.Multiplier Effect, Bayesian Nash Equilibrium, Cheap-talk Extension, Arms Race Game

Leader Reputation and Default in Sovereign Debt

This paper compares default incentives in competitive sovereign debt markets when leaders can be either democratically elected or dictators. When leaders can be replaced as in democracies, the incentives for repayment are mainly the ego rents from office and the possibility of getting a corrupt leader from replacement. In a dictatorship, on the other hand, the cost of not repaying loans is the permanent loss of reputation and the loss of future access to credit. There is a trade off between repayment and risk sharing. We show, counter-intuitively, that when ego rents are low, and value of reputation to dictators is high, then democracies repay more often and have lower risk premia than dictatorships.

Arms Races and Negotiations

A state which does not desire an arms race may nevertheless acquire new weapons if it believes another state will acquire them. If each state assigns some arbitrarily small probability to the event that the other state has a dominant strategy to acquire more weapons, then a multiplier effect appears, and the unique Bayesian Nash equilibrium involves an arms race with probability one. However, if the prior probability that a player is a dominant strategy type is sufficiently small, then there is an equilibrium of the cheap-talk extension of the arms race game where the probability of an arms race is close to zero.